We just witnessed the collapse of two large US banks -- Signature Bank and Silicon Valley Bank (SVB). A few others are also reportedly in the same mess.

History taught us that banks do fail. But these circumstances are uncannily like 2008 and may be worse. We can easily remember the case of Lehman Brothers in 2008. However, SVB was no Lehman Brothers. Where Lehman bet almost its entire balance sheet on risky mortgage bonds, SVB had a surprisingly conservative balance sheet. As of December 31, 2022, SVB had $173 billion in customer deposits and only $74 billion in loans.

SVB did not fail because it was making a bunch of high-risk NINJAS (no income, no job, and no assets) or dicey loans. SVB failed because it parked most of its depositors' money ($119.9 billion) in US government bonds.

US government bonds are supposed to be the safest asset. But many didn't realise even government bonds can lose value. Most of SVB's portfolio was in long-term government bonds, like 10-year Treasury notes, and they are extremely volatile.

In March 2020, the Treasury Department sold 10-year Treasury notes at as low as 0.08 per cent. A week ago, the yield was more than 4 per cent.

As treasury managers, we were made to understand that bonds lose value as interest rates rise. And this is what happened to SVB. They were loaded with long-term government bonds when interest rates were much lower. The average weighted yield of its bond portfolio was just 1.78 per cent.

The same bonds that SVB bought two to three years ago at 1.78 per cent now yield between 3.5 per cent and 5 per cent, meaning that it was sitting on steep losses. Its 2022 annual report, published on January 19, showed about $15 billion in unrealised losses on government bonds. It only had about $16 billion in total capital, so the $15 billion in unrealised losses was enough to kill it.

Since the 2008 financial crisis, legislators and bank regulators have rolled out an endless number of new rules to prevent another banking crisis, but it seems without much results.

SVB passed its stress tests very satisfactorily. It also passed the examinations of the Federal Deposit Insurance Corporation (FDIC), the primary banking regulator in the United States, its financial audits, and its state regulatory audits. It was also followed by dozens of Wall Street analysts and many of them had previously issued strong 'BUY' advice on its stock.

SVB published its 2022 annual financial report after the market closed on January 19. This was the same financial report where it posted the $15 billion in unrealised losses.

The day before the earnings announcement, SVB stock closed at $250.04. The day after the earnings call, the stock closed even higher at $291.44. This means despite SVB management disclosing that its entire bank capital was effectively wiped out, Wall Street investors excitedly bought the stock and bid the price up by 16 per cent. The stock continued to rise, reaching $333.50 on February 1.

It told us that all the warnings were there but the experts failed again. The FDIC saw SVB's dismal condition and did nothing. The Federal Reserve also reportedly did nothing. Within a matter of days, its stock price plunged, depositors pulled their money, and the bank failed.

The same happened with Lehman Brothers in 2008 and to some extent with a few others too. What were the lessons learned?

Now is the time to return to basics: better liquidity management, better balance sheet management, and of course, better internal governance, not very good profit or fancy awards.

The author is an economic analyst